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PHARMA & TECHNOLOGY: JSK on scenario planning, Mittman on forecasting

If you go down a couple of pages in this edition of Pharma Marketing News you’ll find an interesting article written about a speech Jane Sarasohn Kahn gave to a pharma conference about scenario planning. Once you’ve taken a look at that, read this article by Robert Mittman on forecasting technology change. If you can steal the components of these two pieces and make a powerpoint chart, you can now officially call yourself a futurist.

Hey, it’s worked for me for years…..

PHARMA: Pharma stocks–Apparently it’s all Kerry’s fault

Investment magazine Barron’s claims that the pharma sector’s stocks have slid because of fears that Kerry will win the election and presumably institute price controls. Quite how he’ll do that with a Republican house and Senate is a good question, unless of course Barron’s thinks that the Democrats will sweep those races too. And further to this question if you look at the 6 month chart of Astra-Zeneca, BMS and Pfizer versus the S&P, you notice that over time only BMS has really hit the skids–and that has far more to do with Pravachol’s impending patent expiration.

And of course if you want to compare stock prices, note that as shown in the chart below Pfizer’s stock price tripled in the second Clinton administration, and has gone down under Bush.

So I suspect that no matter who’s in power, you’re better off being a pharma with a great pipeline than one with great clout in DC!

POLICY: Redefining the underserved–1 in 8 Americans have no access to basic care

I’ve just returned from a hospital meeting at which some take-all-comers, mission-driven hospitals are seeing bad debt ratios of up to 12% of patients, and at the same time the National Association of Community Health Centers reports that 36 million Americans lack access to basic care. These are not just the uninsured, some of whom do get access to care–hence the 12% bad debt ratio at that hospital. And don’t forget that at any one time 1 in 7 Americans is uninsured.

But roughly half the 36 million do have some level of insurance, even if it’s Medicaid (which in a state like Texas is barely what most of us would recognize as health insurance). The problem is not so much insurance as it is access to providers. As Dan Hawkins, Vice President For Policy at NACHC said:

    "They live in inner-cities and in isolated rural communities. But no matter where they live, the story is the same: they can’t get health care because there aren’t enough doctors in their communities who are willing or able to care for them."

The dirty little secret of American health care is that although we have an over abundant supply of facilities and doctors on a national level, at a micro-regional level there are areas that are severely under-served. Many rural regions have less than one-third the number of doctors per head that are seen in affluent suburbs, and if you are living in an inner city area, the experience is similar. The dedicated folks doing the worthy work at community health centers and in county hospitals are desperate to get this message across. Dr. Gary Wiltz, MD, Executive and Medical Director of Teche Action Board in Franklin, Louisiana said:

    "Where the unserved live, there are higher rates of infant and childhood illnesses, and higher mortality rates. In my state, which is the most medically unserved state in the union, we have a diabetes rate that is out of control–and that is because the diabetics who need help don’t have a doctor, or can’t go to a doctor because they don’t have transportation; or can’t afford a doctor, or even the medicines they prescribe."

This doesn’t stop when patients become eligible for Medicare, even though it’s not supposed to be a "separate but equal" system as Medicaid tends to be. Several reports including this one about knee surgery rates published in the New England Journal of Medicine last year, or this one in JAMA about access rates for Medicare HMO enrollees show that minority populations are less likely to get care than whites. And it’s not racism on the part of plans or providers that’s the cause. The problem is that there are fewer providers where minorities tend to live.

Of course the health service researcher cynics amongst us might think that minorities are doing better because they get less care, but a Kaiser Family Foundation report shows that being poor, non-white, un or underinsured and having problems with language severely restricts access to care, and results in much poorer health outcomes for those groups. For instance:

    One result of limited access to primary and preventive health care is an increase in the extent to which patients are hospitalized for conditions, like asthma, that could be avoided with appropriate primary care. Gaskin and Hoffman found that Latino children and African American adults were more likely to be hospitalized for such preventable disorders than similar white patients. Disparities in access to care are not a new or recently discovered phenomenon; studies done in the mid-1980s found that Latino adults and children had substantially less access to a variety of health care services than their white peers.

Sadly the political impact of this report will barely make a ripple in the sea of the healthcare system it’s dropped into.

HEALTH PLANS: It’s a good year for the Rowe(ses)

2003 certainly was kind to Aetna which managed to complete its turnaround started in 2001. Back in the mid-1990s Jack Rowe was running Mount Sinai hospital in New York, and making less than $1 million a year. In my earshot he asked Ian Morrison to kindly not refer to hospital CEOs as overpaid facilities managers as Ian (then my boss) was inclined to do at board presentations! When Aetna was sailing to disaster after its US Healthcare merger and was getting killed in the market by underestimating its costs, and being sued by every physician in America, it went looking for a physician-friendly management team. Rowe was the physician executive the board chose to lead them away from the brink of disaster.

Rowe’s strategy was to be friendly to the doctors (and Aetna settled a huge lawsuit with several thousand of them), while figuring out which of Aetna’s client groups were unprofitable (and there were many) and getting rid of as many of those groups as possible. In the midst of that brutal turnaround Aetna actually increased its IT spending so it could get a more accurate read on client profitability and do better, more accurate, and faster underwriting. I recently saw a presentation about the turnaround which showed that before that IT investment they were working off cost data that was over 2 years old and were setting their rates essentially blind to the real costs. The same IT strategy finally integrated the numerous companies it had bought in its 1990s expansion binge, although as Jamie Robinson pointed out in a comprehensive article on the turnaround in the most recent Health Affairs, that essentially meant getting rid of huge books of business at a big loss, including virtually the whole of the Prudential business it had bought in the mid-1990s. Aetna also basically gave up the care management activities that in 1996 it had purchased US Healthcare with the then intention of adopting them system-wide. That HMO of course had the goal of actively managing care delivery at the individual provider level and was in a big way responsible for the backlash against managed care on the east coast.

So it’s another story of a great corporate turnaround, but of course there’s a But. The goal of health insurance companies is supposed to be to deliver increasingly better services at increasingly better price to their clients. While the corporate machinations engineered by Rowe’s team (which included lay-offs, culture change, the IT investment, and keeping a management team focused under conditions of great uncertainty in 2001 and 2002) should be applauded, , I’m not sure anyone’s much better off other than Aetna’s shareholders. For a start, it’s very likely that the several thousand laid-off employees aren’t.

Aetna earned $966.8 million profit in 2003, compared with a $266 million loss in 2001. And for this in 2003 Rowe got paid $18m. Ex-Blue Cross of California President, and current Aetna President, Ron Williams received $9.1 million, plus stock options that could be worth another $4.3 million. So the "risk" they took leaving secure and well paid employment certainly paid off!

However, all Aetna has really done is accurately mine and understand the information on its client base to figure out which client groups among them were better actuarial risks. So at a system level it’s contributed to the increase in health premiums seen over the past few years, both by sticking price increases to its clients and by adding a pool of not-so-good risks to the rest of the market–some of whom probably found themselves unable to get insurance. So either their "greater fool" competitors, or their former clients, or the rest of us taxpayers are footing the bill for those groups that Aetna got rid of. Meanwhile, the taxpayer is paying uninsurance benefits to the employees let go, and the clients who stayed with Aetna didn’t exactly see their premiums go down.

So while this is business turnaround success story, because Aetna gave up attempting to manage care and innovate in the face of medical cost increases, it’s actually set back the role of health insurers as a potential source for progress in the system. And I don’t think Jack Rowe could argue with a straight face that he’s not overpaid any more.

Coda: Rowe is of course by no means alone among unbelievably highly paid health insurance executives in either the private sector, in PBMs and among the non-profit Blues, who have all reaped massive rewards for making their companies profitable mostly by being able to stick price increases to their corporate clients. And their clients in their idiocy or their incompetence seem to feel they have no option but to take it in their necks and then to try to pass it on to their employees. As I’ve said before, this cannot last forever, but it can go on for a while.

Afternote: After writing this I re-read Jamie Robinson’s article and realized that great minds think alike (or I subconciously stole his theme–take your pick!). Jamie wrote in his conclusion:

    The implications of its turnaround are less unambiguously positive for the health system as a whole, however. The employment-based health insurance system is proving to be less willing and able to perform the redistributive functions of social insurance in addition to the risk-spreading functions of market insurance. The nation appears unenthusiastic about any prospect of pursuing social insurance through explicit taxes and subsidies, continuing to prefer implicit transfers that do not raise the specter of big government (even as an alternative to big business). In the absence of adequate governmental subsidies for less healthy citizens, however, Aetna’s improved ability to predict and price risk will expose it to obloquy as a failure at social insurance rather than to praise as a success at market insurance. In the health care sector, where no one agrees on the appropriate division of labor between the public and private sectors, no good deed goes unpunished.

HOSPITALS: Another Tenet settlement, but more coming

Tenet stock fell a little today (fresh from rallying after I’d sold it!) on news that it agreed to a $30.75M settlement for its conduct in Florida seven years ago and some nursing homes shenanigans nationwide. Tenet had put aside somewhere in the range of $50m for this settlement and others, but doesn’t have that much cash left (around $425m) and appears to be burning cash faster than it’s making it. The key question remains, what is the amount that it will have to pay off to settle the rest of its fines? That may be the difference between survival and bankruptcy.

INDUSTRY: PPM evolution–US Oncology to be bought

Buy-out fund Welsh, Carson has bought the biggest for-profit physician group US Oncology. This suggests to me that the market is unlikely to be rewarding oncologists while the whole issue around reduced fees for oncology drugs gets sorted out. THCB oncology correspondent Matt Quinn agrees:

    US Oncology treats about 15% of newly diagnosed cancer patients. USON has persued a strategy of revenue growth by dominating cancer care in medium markets and by negotiating low drug prices (in relation to both other oncologists and AWP) with pharma. They also are large enough to provide critical mass for pharma drug trials… With the pharma side of the equation drying up, it appears that they think the market will react unfavorably. And perhaps they want to hide the "sausage-making" that must go on as they transition business models. I’d be interested to know the docs are reacting to this and whether and how quickly they can "cash out".

BTW if you want to know more from the guts of oncology pricing, here’s this gem from the Pete Stark archives in 2001. It was this kind of drug "pricing" strategy that eventually got CMS’ attention in the past year.

PHARMA: The Motley Fool on drug costs, here and there

The Motley Fool, which is a site for individual investors, has noticed that over the long hauldrug costs are likely to be compressed over time.

    If current trends continue, it’s not hard to imagine some form of caps. Of course, the U.S. could try to convince Canada, Japan, and Europe to eliminate price controls by arguing that unfettered markets will lower costs for everyone. Europe is currently wrestling with its own drug importation issues, because, although most governments employ controls, prices vary widely from country to country. Given European governments’ lack of progress in reforming their welfare states, though, a total rollback seems highly unlikely. A more probable outcome is that the U.S. would adopt a compromise position between its current system and those of other developed countries. Still, any governmental reform would probably involve some erosion in profit margins.

In other words we’re eventually going to end up with lower pricing relative to Europe over time. But from the investors perspective they also believe that:

    The pharmaceutical industry almost certainly will never turn into a low-margin business like consumer electronics.

This is pretty obvious and is another rebuttal to the argument that any attempt to prevent pharma companies price gouging will of necessity stop all pharma R&D. I think their opinion is about right, but then I’ve said that at length before.

HOSPITALS: Scully shorts Medcath? Well not exactly but….

There’s a report in the weekend Washington Post that among his other "achievements" (like the muzzling of the actuarial projections about the cost of Medicare drug coverage) Tom Scully made some remarks that sunk the stock of specialty heart hospital MedCath a couple of years ago. The story is that he essentially hinted at an investment bank’s dinner that the government was going to overturn the exemption that specialty hospitals enjoy from Medicare’s ban on physicians’ self-referring.

What this is about is that, at the moment some facilities can be indirectly owned by doctors and they can bill both for the physician fee, and collect some share of the facility fee–not directly, but in terms of being a part-owner of the facility. Without getting into a lot of arcane law around these "Stark Amendments" about which I don’t remember everything, it’s worth understanding two things. One is that a lot of doctors got rich and Medicare’s finances suffered in the late 1980s when physicians started buying into home-infusion companies and then started referring their patients to them. A lot of the behavior going on then went well over the ethical line, with doctors basically referring to companies they owned or had a part of. Alternately they were also being directly bribed to refer to others– Caremark was heavily involved in this back before it was a PBM and even before it was PPM. After that Democrat Pete Stark introduced a series of legislation that basically made it very difficult for doctors to refer to a facility in which they had an ownership interest.

More recently hospitals have been struggling with the desire of physicians to move their practices into small hospitals that are "focused factories" and tend to specialize on one or two "service lines". This is a real threat to community hospitals. They tend to make money in a few areas (cardiology, neurology, general surgery, orthopedics, etc) and lose it everywhere else. If those profitable service lines walk out the door, then things get very grim very quickly for the community hospitals–and they are all struggling with this issue at the moment. In fact one of the bribes that they were paid concessions the AHA was granted to get its support for the recent Medicare PDIMA bill was to put a moratorium on the building of these new specialty hospitals. Obviously if CMS decided that specialty hospitals owned by doctors fell under the self-referral part of the Stark amendments, that scuppers their expansion plans dramatically. At the least it would force them into significant ownership re-organizations, and give the community hospitals some leverage in gaining back the high-admitting specialists who wield big financial clout in local markets.

To be fair to Scully, although MedCatch’s stock fell the day in question (April 22, 2002), it’s a small cap and very volatile stock, as you can tell from its 5 year chart. I hardly think Scully was short and trying to make money off it, so he probably let slip a fairly rational view from both his standpoint as guardian of the CMS purse and from his time representing the for-profit hospital industry. That view is that by leaving the less profitable "service lines" behind in the hospital, companies like MedCath are raising the overall average hospital cost per case, which in the end will get translated back as cost increases to big payers (like CMS). That’s not likely to be acceptable in the long run to payers and, while there are some efficiency advantages from creating these "focused factories," there’s not much benefit to society if the margins gained from capitalizing on these efficiencies go to subsidize the spending habits of surgeons and specialty hospital shareholders, rather than towards (say) the care of the uninsured in community hospitals. Pete Stark has said exactly as much in legislation he’s introduced that targets Medcath directly.

So Scully may have made a minor faux pas, and he maybe a convenient scapegoat for the Republicans as he just left the Administration, but I don’t think that he was really doing anything worse than giving the official line. After all, Alan Greenspan has far more impact any time he opens his mouth. Was he short the Dow the day of this speech?

INTERNATIONAL: . . . . and you thought doctors were difficult in the US

Word from the UK is that a leading neurosurgeon either took a refill of a bowl of soup or just some more croutons from the hospital cafe (depending on whether you believe him or the canteen staff) and he’s been suspended! This means that at least three operations in his hospital have been cancelled. And this is in England. You remember England, the place where like Canada where you have to wait forever for surgery and 10 months to get a hospital spot for a normal delivery.

On the other hand, it’s probably no skin off the nose of the surgeon, as he almost certainly makes more in his part-time role in the private sector than he does with the NHS, and most likely has been suspended on full pay. I know another British surgeon, who makes the odd appearance in THCB because, well, he’s my father, who was so browned off with the administrators at his hospital that he spent ages trying to figure out how to be suspended on full pay. I bet he never thought of pinching a packet of croutons. And of course now he’s retired–oh, the missed opportunity! Dad, if only you’d known!